Coca-Cola Amatil has much food for thought

Back in the 1970s, Coca-Cola was sold to thirsty masses through simple but alluring slogans such as “Coke is it", “Coke adds life" and “Enjoy".

In recent years, the soft drink giant’s marketing department has signed off on more curious versions such as “Real" (2003), “Open Happiness" (2009) and “Twist the Cap to Refreshment" (2010).

While the quality of the slogans has deteriorated,
Coca-Cola Amatil
’s (CCA) growth ambitions have not, despite a series of major setbacks this year, including a spat with super­market heavyweight Woolworths and problems with its SPC food manufacturing operations.

Weak consumer sentiment and a chilly start to the NSW summer are the latest negatives to take the shine off an almost unblemished decade of double-digit profit growth at the ­bottler under the reign of boss
Terry Davis
.

CCA’s relationship with Woolworths and the other supermarket heavyweight, Coles, has also entered dangerous new territory, although investors hope the power of the Coke brand will help it fight off any aggressive move by the grocers.

Davis was on the road on Friday when CCA delivered a long-awaited trading update, which ­confirmed the market’s expectations that profits were being hurt by tough market ­conditions.

Far from losing faith in Davis’s 10-year tenure as managing director, despite the ill-fated SPC investment, investors are still confident he can keep driving growth at the ­bottler by forging new distribution deals and growing in Asia.

Davis, who has a 12-month rolling contract, must give a year’s notice if he quits and there is no sign so far that he will do so, although the Coke boss has adopted a lower public profile in recent months than in the past.

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Davis and his potential successor, Warwick White, who runs the Australian business, have a lot to think about over the Christmas break as the company considers new growth options in a tough market following the decision to sell its 50 per cent stake in Pacific Beverages to Foster’s new owner, SABMiller.

The SABMiller deal takes CCA out of the Australian beer market for the next two years but will boost the company’s second-half net profit by $165 million at a time when it needs it to cushion $105 million in restructuring costs from SPC.

CCA will start due diligence in the first quarter next year on Foster’s spirits, alcoholic ready-to-drink (ARTD) and non-alcoholic beverages, as well as its Fijian brewery operations.

The company expects to pay somewhere between $100 million to $180 million for those assets.

While Davis is not understood to be contemplating any major strategic shift in strategy, speculation surfaced on Friday that snack-food manufacturer and marketer The Smith’s Snackfood Company could be returning to the CCA stable.

United Biscuits originally bought Smith’s from CCA before selling the business to US giant PepsiCo in 1997.

Davis has also made it very clear he plans to re-enter the beer market in 2014 when the existing agreement with SABMiller to stay away from the amber brew expires. Meanwhile, CCA can still operate in other beer markets in New Zealand.

One option is buying the operating licence for big-selling Mexican import Corona from SABMiller.

CCA’s prospects in Indonesia, which is expected to notch up more gains next year as CCA expands capacity, also look promising.

The big headache for Davis next year will be the company’s SPC ­Ardmona division, which has been a major blemish on his tenure as ­managing director.

CCA has undertaken five reviews of the fruit and vegetable processor since forking out $685 million in cash, shares and assumed debt for the business in 2005. It will pay another $105 million in costs this year as it implements an expensive restructure.

If that fails Davis will have to sell and redirect the capital back into the beverages business, where it will be better served.

Pricing is the most powerful driver in CCA’s earnings model, although the company still relies to a lesser extent on product innovation and cutting costs to improve margins.

There is some concern that its ­ability to raise prices will be limited by weak consumer sentiment and that cost efficiencies cannot cut much deeper without hurting the underlying business.

Another problem is supermarket chains Woolworths and Coles, which are increasingly willing to flex their muscle and fight against requests for price rises from major brand owners like Coke.

Analysts estimate CCA sells 40 per cent to 60 per cent of its products through supermarkets.

CCA lost market share in Woolworths between May and September this year because of a dispute over trading terms.

The grocer retaliated against CCA’s resistance to new terms by promoting products from rivals such as Schweppes, in a move Macquarie estimated may have resulted in Coke trading down by as much as 20 per cent in the September quarter.

While the two are believed to have since made up their rift and Coca-Cola is now regularly promoted in Woolworths’ weekly catalogues, ­relations are said to remain sour and there is a danger of a repeat ­performance.

The main weapon in CCA’s armoury against the supermarkets will be the power of the Coke brand, which even after all these years and some questionable slogans is the company’s most powerful asset.